Nicolas Véronhttp://veron.typepad.com/main/
Thoughts, articles and references on business, finance, public life, and moreen-US2015-05-06T11:33:52-04:00

Europe's Radical Banking Union: New Essay Publishedhttp://veron.typepad.com/main/2015/05/europes-radical-banking-union-new-essay-published.html
Bruegel just published my new essay, Europe's Radical Banking Union, in which I go back to the genesis of banking union and take stock of its current development and likely impact. The text is a significantly expanded and updated version...<p><a class="asset-img-link" href="http://veron.typepad.com/.a/6a00d834cda30153ef01b8d10f5ede970c-pi" style="display: inline;"><img alt="Cover_2015_BkU" border="0" class="asset asset-image at-xid-6a00d834cda30153ef01b8d10f5ede970c img-responsive" src="http://veron.typepad.com/.a/6a00d834cda30153ef01b8d10f5ede970c-800wi" title="Cover_2015_BkU" /></a></p>
<p>Bruegel just <a href="http://www.bruegel.org/publications/publication-detail/publication/880-europes-radical-banking-union/" target="_self">published</a> my new essay, <em>Europe&#39;s Radical Banking Union</em>, in which I go back to the genesis of banking union and take stock of its current development and likely impact. The text is a significantly expanded and updated version of a chapter to be published later this year in an <a href="http://ukcatalogue.oup.com/product/9780198727309.do" target="_self">Oxford University Press volume</a>.&#0160;</p>
<p>In addition to presenting the architecture and early implementation of banking union, and especially of the new role of the ECB as banking supervisor, the essay makes the case that two major developments, the ECB&#39;s OMT program of 2012 and the shift of EU policy stance from bank bail-outs to &quot;bail-in&quot;, would not have been possible without the banking union decision made by the euro area&#39;s political leaders in late June 2012. Seen in that light, the shift to banking union was the true (and mostly unsung) turning point of the euro crisis.&#0160;</p>
<p><span class="asset asset-generic at-xid-6a00d834cda30153ef01b7c7868256970b img-responsive"><a href="http://veron.typepad.com/files/bruegelessay_2015_bankingunion.pdf">Download the file here</a>&#0160;if the above link does not function properly.&#0160;</span></p>Bruegel PublicationsNicolas Véron2015-05-06T11:33:52-04:00The Many Births of Bruegelhttp://veron.typepad.com/main/2015/05/the-many-births-of-bruegel.html
This post was published by Bruegel on April 20, as start of a series on How Bruegel Was Born to be continued later this summer. Ten years ago, on 20 April 2005, Bruegel’s fledgling team moved into what would become...<p><em>This post was <a href="http://www.bruegel.org/nc/blog/detail/article/1614-the-many-births-of-bruegel/" target="_self">published by Bruegel on April 20</a>, as start of a series on How Bruegel Was Born to be continued later this summer.&#0160;</em></p>
<p>Ten years ago, on 20&#0160;April 2005, Bruegel’s fledgling team moved into what would become its permanent address, on the third floor of 33&#0160;rue de la charité / liefdadigheidstraat 33 in Brussels. The works to adapt our premises to their use as a think-tank venue was still far from finished. A few days later, Bruegel’s Board held its second meeting in what was still a makeshift boardroom in a vast open space. Most internal walls came only later.</p>
<p>At that time, Jean Pisani-Ferry, who had been appointed Bruegel’s first Director in January, Yvonne Hilario, Jozefien Van Damme and I were still entirely focused on the early operational and organizational build-up, also relying on Soizick Bévan as the project’s generously pro bono consultant. The research team would take initial shape only later in the spring, with the arrival of André Sapir as Bruegel’s first Senior Fellow, followed by three Research Fellows who have since moved on to expanded horizons: Alan Ahearne as a senior Irish financial and monetary policymaker, Juan Delgado as chief economist of the Spanish Competition Authority, and Jakob von Weizsäcker as Member of the European Parliament from the German SPD party.</p>
<p>That year 2005 was effectively when Bruegel started. There were many milestones, all of them important. On 17&#0160;January, the Board had its first meeting, at Brussels’s timeworn University Foundation near the Royal Palace. Under Chairman Mario Monti’s leadership, it adopted the name Bruegel – which Monti had himself suggested, playing on the idea of a “Brussels European and global economic laboratory” – and marked the start of Bruegel actual operations. The day after, Monti and Pisani-Ferry held a press briefing in which the new child was announced to the world, and received promising initial coverage.</p>
<p>Die Zeit emphasized the project’s Gemütlichkeit, calling it “Bruegels Denkstube”; Libération noted approvingly that it might help Europe find a voice to match les influents think tanks américains; the Italian press understandably focused on what the Bruegel chairmanship suggested about Monti’s future moves; and the Financial Times wrote “Monti recalled that Bruegel (the Elder, of course) was also known for his depiction of the Tower of Babel, which the think-tank would not resemble in the slightest.” A few days later, columnist Brian Groom noted in the same newspaper that “Initial fears at the European Commission that [Bruegel] would be another French-German manoeuvre to seize back the political initiative has turned out wide of the mark.”</p>
<p>After the move to the new offices, Bruegel held its first workshop there, on 13&#0160;May, on “Europe’s productivity drift and how to reverse it”. On 27-28&#0160;June it held its first high-level conference on the challenge to trade multilateralism from regional deals, a theme that also resonates these days, in the historic Erasmus House in Anderlecht. On 9&#0160;September, Bruegel’s first paper, written by André Sapir, was distributed and discussed at an informal ECOFIN meeting in Manchester. That same paper, “Globalization and the Reform of European Social Models”, was published as Bruegel’s first Policy Brief on 24&#0160;October, on a visual charter designed by Jean-Yves Verdu, who had also created the Bruegel logo. It firmly established Bruegel as a source of influential policy ideas from the very outset.</p>
<p>Even though the events of 2005 felt like a series of beginnings, they were also the culmination of a process of gestation that had started three years earlier. Both Jean Pisani-Ferry and I had been thinking about the possibility of a new European think tank, first on separate tracks and then jointly after a lunchtime conversation in Paris on 18&#0160;October 2002. The project was launched on 22&#0160;January 2003, by Jacques Chirac and Gerhard Schröder as part of the joint French-German declaration on the 40th anniversary of the de Gaulle-Adenauer Elysée Treaty. After some delays, it was then further elaborated by a French-German working group that brought it to discussion within the European Economic and Financial Committee, initially introduced by Jean-Pierre Jouyet and Caio Koch-Weser on behalf of their respective finance ministries. On 9&#0160;March 2004, 11&#0160;EU member states (Belgium, Denmark, France, Germany, Hungary, Ireland, Italy, the Netherlands, Poland, Spain, and – last but never least – the UK) announced their initial agreement to support Bruegel’s launch, conditional to successful fundraising from the private sector that was secured later in 2004. Pisani-Ferry was appointed project manager on 1&#0160;April 2004, and the legal entity that is Bruegel was formally created on 10&#0160;August 2004. This paved the way for the formation of Bruegel’s first Board, which Monti accepted to chair shortly after leaving the European Commission in late October 2004.</p>
<p>All these dates were, each in its own way, birthdates of Bruegel. Since then, our think tank has rapidly gained recognition and reputation, indeed more quickly than its founders initially thought possible. As for real estate, we expanded further in 2008, and will do so again later this year with a larger room for workshops and conferences and new facilities for our visitors and staff.</p>
<p>Bruegel is typically focused on the present and future, more than on the past. Nevertheless, the tenth anniversary of its start provides an appropriate occasion to recall how it all started. As one who was present at the creation, I will tell that story in further blog posts in the course of this year of celebration – while at the same time wishing Bruegel many more decades of success, expansion, and hard work.&#0160;</p>Blog PostsNicolas Véron2015-05-05T11:51:12-04:00A Long Term Vision for Europe's Capital Markets Unionhttp://veron.typepad.com/main/2015/04/a-long-term-vision-for-europes-capital-markets-union.html
Last Saturday in Riga (Latvia), I presented this paper to the EU's financial ministers and central bank governors gathered for the "informal ECOFIN" meeting, jointly with Bruegel's director Guntram Wolff. This was in response to a request from the Latvian...<p><a class="asset-img-link" href="http://veron.typepad.com/.a/6a00d834cda30153ef01bb0825a698970d-pi" style="display: inline;"><img alt="Cover_2015_CMU" border="0" class="asset asset-image at-xid-6a00d834cda30153ef01bb0825a698970d img-responsive" src="http://veron.typepad.com/.a/6a00d834cda30153ef01bb0825a698970d-800wi" title="Cover_2015_CMU" /></a><br />Last Saturday in Riga (Latvia), I presented <a href="http://www.bruegel.org/publications/publication-detail/publication/878-capital-markets-union-a-vision-for-the-long-term/" target="_self">this paper</a>&#0160;to the EU&#39;s financial ministers and central bank governors gathered for the &quot;informal ECOFIN&quot; meeting, jointly with Bruegel&#39;s director <a href="http://www.bruegel.org/scholars/scholar-detail/scholar/213-guntram-b-wolff/" target="_self">Guntram Wolff</a>. This was in response to a request from the Latvian Government, which currently holds the presidency of the Council of the EU.&#0160;</p>
<p>In the paper, we propose a definition of the Capital Markets Union agenda, an analysis of its rationale and potential economic impact, a concrete policy agenda, and a possible way to implement it with realistic sequencing, taking into account the European Commission&#39;s announcement of an &quot;action plan&quot; to be published later this year.&#0160;</p>
<p><span class="asset asset-generic at-xid-6a00d834cda30153ef01bb0825a6cb970d img-responsive"><a href="http://veron.typepad.com/files/bruegelpolicycontribution_2015_cmu.pdf">Download the document here in PDF format</a>&#0160;in case the above link does not work.&#0160;</span></p>Bruegel PublicationsNicolas Véron2015-04-29T04:13:53-04:00Banking Union & Capital Markets Union: Prospects for 2015http://veron.typepad.com/main/2015/01/banking-union-capital-markets-union-prospects-for-2015.html
This opinion piece was published last week by Caixin, in Chinese and in English, under the title "The Reshaping of Europe's Financial System," and reposted by the Peterson Institute. Financial crises always challenge conventional assumptions about financial systems. Europe is...<p><em>This opinion piece was published last week by Caixin, <a href="http://weekly.caixin.com/2014-12-26/100768420.html" target="_self">in Chinese</a> and <a href="http://english.caixin.com/2015-01-06/100771393.html" target="_self">in English</a>, under the title &quot;The Reshaping of Europe&#39;s Financial System,&quot; and reposted by the <a href="http://www.piie.com/publications/opeds/oped.cfm?ResearchID=2739" target="_self">Peterson Institute</a>.&#0160;</em></p>
<p>Financial crises always challenge conventional assumptions about financial systems. Europe is no exception. Before 2007, most Europeans thought that their system, which was dominated by banks supervised by national authorities, provided them the safe and efficient financial services they needed. But the crisis has revealed unsuspected fragilities in Europe&#39;s banks, and the consequences are still unfolding. The year 2015 will see new steps in the resulting transformation of European finance.</p>
<p>The most important policy initiative so far has been the inception of a banking union in 2012. This refers to the decision to endow the European Central Bank (ECB) with central authority over banking supervision in the euro area, and to create a new European agency to handle future cross-border banking crises. The ECB duly took on its supervisory responsibility in November, and the bank resolution agency will be operational in a year&#39;s time. In July, the new president of the European Commission in Brussels, Jean-Claude Juncker, announced another financial reform effort, which he called a capital markets union. He presented it as a push to develop non-bank financing of the European economy. A debate has started on the capital markets union&#39;s exact ambition, timing and content.</p>
<p>The economic reasoning behind all this is sound. Contrary to pre-crisis consensus, Europe&#39;s overdependence on banks has meant fragility not strength. When banks need to repair and reduce their balance sheets following financial turmoil, as is now the case, there is no &quot;spare tire&quot; to keep providing credit to the economy. This stands in contrast with the more diverse U.S. financial system, where bank restructuring in 2009-10 did not have contractionary impact because alternative channels of financing were available. It thus makes sense for Europe to develop larger, more integrated capital markets. The European commissioner in charge of financial services legislation, Jonathan Hill, can safely move his teams&#39; attention from banks to capital markets, while his predecessor, Michel Barnier, had to concentrate most of his focus on banking laws that are now enacted.</p>
<p>However, EU policymakers should have no illusion about the pace of change in the structures of the financial system. Strong, vibrant capital markets will take many years to develop. In the meantime, banks will remain the mainstay of European finance, and banking policy will still have much more economic impact than new capital markets legislation.</p>
<p>Thus, in the short-to-medium term, the central role in addressing Europe&#39;s financial challenges will be played by the ECB, not the European Commission. The ECB has a heavy agenda in its new role as Europe&#39;s banking supervisor. First, it should enforce a more harmonized and rigorous definition of capital. Second, it should put an end to the constraints imposed by national regulators, which prevent pan-European banks from shifting capital and liquidity across borders within the euro area, and thus lead to harmful financial fragmentation. Third, it should force banks that hold excessive amounts of sovereign debt issued by their home country to rebalance their debt portfolios and reduce their home-country sovereign exposure to at least below one-quarter of regulatory capital. Fourth, it should adopt a consistent policy framework for groups of small banks that support each other, such as Germany&#39;s savings banks, to ensure they do not result in hidden systemic risk. Fifth, the ECB should dramatically enhance the transparency of supervisory and risk information that it provides about banks, and that banks provide about themselves. This would build on the numerous disclosures made last October at the close of the ECB&#39;s initial assessment of the euro area&#39;s 130 largest banks, but making these disclosures regular time series rather than a one-off observation.</p>
<p>Most importantly, the ECB must finish the job that has been started with that comprehensive assessment. The massive exercise of asset quality review and stress testing was a significant step in the right direction, but has not yet restored confidence in Europe&#39;s battered banking sector. The ECB must reassure the doubters. It should ask all banks it supervises, including those whose shares are not publicly listed, to disclose their capital ratio under a definition truly compliant with the global Basel III standard. All the discrepancies between that standard and the EU&#39;s Capital Requirements Regulation, as listed in a recent report from the Basel Committee, should be corrected in such calculations, except possibly the zero-risk-weighting of EU sovereign debt, as long as the euro area does not have a sustainable fiscal framework. The ECB should mercilessly wield its supervisory authority to impose higher capital requirements on all banks it considers unviable and trigger a resolution process if those requirements are not met. In other words, kill the zombies and heal the wounded. This thankless work should be essentially completed by the end of 2015. Waiting beyond that date would make it much more difficult, as the ECB will be held responsible for its own supervisory shortcomings in the meantime.</p>
<p>By contrast, the capital markets union agenda is entirely about the long term. Trying to boost its short-term impact, with public subsidies or regulatory shortcuts, will only result in harmful distortions that will defeat the initiative&#39;s purpose. The level of ambition should be correspondingly high. Rather than tinkering at the edges of securities regulation, the European Commission should aim at substantially harmonized frameworks for insolvency law and the taxation of savings; an integrated supervisory and resolution system for key markets infrastructure firms; fully consistent financial disclosures, accounting and auditing practices across EU countries; and an asset management industry that better serves the interests of European investors and savers.</p>
<p>The EU has many problems. Its growth is anaemic, and unemployment too high. Some of its member states are still living beyond their means. Its citizens are increasingly resentful of political elites and institutions. But in financial services policy, it may belatedly be moving in the right direction. The ECB&#39;s banking policy actions in the short term, and the European Commission&#39;s capital markets legislation in the long term, have the potential to make Europe&#39;s financial system more stable, more diverse and more efficient, to better serve the needs of European households and companies. This opportunity must not be missed.</p>Other ArticlesNicolas Véron2015-01-13T21:32:21-05:00The European Union Lags on Basel IIIhttp://veron.typepad.com/main/2014/12/the-european-union-is-the-global-laggard-on-basel-iii.html
This post was published this week by Bruegel and the Peterson Institute. The European Union, which often claims leadership on championing global financial standards, has been found to be the global laggard on a key aspect of banking regulation, as...<p><em>This post was published this week by <a href="http://www.bruegel.org/nc/blog/detail/article/1500-the-european-union-is-the-global-laggard-on-basel-iii/" target="_self">Bruegel</a> and the <a href="http://blogs.piie.com/realtime/?p=4647" target="_self">Peterson Institute</a>.&#0160;</em></p>
<p>The European Union, which often claims leadership on championing global financial standards, has been found to be the global laggard on a key aspect of banking regulation, as documented by the latest report (Dec. 5) of the Basel Committee on Banking Supervision. As <a href="http://www.voxeu.org/article/basel-iii-europe-s-interest-comply">was to be expected</a>, the Basel Committee—in examining adherence to its international banking regulatory framework, known as the Basel&#0160;III accord—found the EU “materially non-compliant,” and the US “largely compliant.” Other jurisdictions reviewed earlier had all been found “compliant.” &#0160;But complying with the Basel framework remains in the EU long-term interest. The EU can get closer to this goal, short-term by actions of the European Central Bank (ECB), and longer term through new legislation.</p>
<p>The two Basel Committee reports on the <a href="http://www.bis.org/bcbs/publ/d300.pdf" target="_blank">European Union</a> and the <a href="http://www.bis.org/bcbs/publ/d301.pdf" target="_blank">United States</a> are part of the Basel Committee’s multiyear Regulatory Consistency Assessment Program (RCAP). In October&#0160;2012, preliminary assessments of the <a href="http://www.bis.org/bcbs/implementation/l2_eu.pdf" target="_blank">EU</a> and the <a href="http://www.bis.org/bcbs/implementation/l2_us.pdf" target="_blank">US</a>, were based on draft rules at the time. A separate assessment found <a href="http://www.bis.org/bcbs/implementation/l2_jp.pdf" target="_blank">Japan</a> compliant. The Committee has also published RCAP reports on <a href="http://www.bis.org/bcbs/implementation/l2_sg.pdf" target="_blank">Singapore</a> (March&#0160;2013), <a href="http://www.bis.org/bcbs/implementation/l2_ch.pdf" target="_blank">Switzerland</a> (June&#0160;2013), <a href="http://www.bis.org/bcbs/implementation/l2_cn.pdf" target="_blank">China</a> (September&#0160;2013), <a href="http://www.bis.org/bcbs/implementation/l2_br.pdf" target="_blank">Brazil</a> (December&#0160;2013), <a href="http://www.bis.org/bcbs/implementation/l2_au.pdf" target="_blank">Australia</a> (March&#0160;2014), and <a href="http://www.bis.org/bcbs/implementation/l2_ca.pdf" target="_blank">Canada</a> (June&#0160;2014), all of which were also found compliant with Basel&#0160;III. Under the Committee’s <a href="http://www.bis.org/bcbs/publ/d299.pdf" target="_blank">current work schedule</a>, assessments of Hong&#0160;Kong, Mexico, India, South Africa, Saudi Arabia, and Russia will follow in 2015, and Argentina, Turkey, Korea, and Indonesia in 2016.</p>
<p>The jurisdictions already assessed cover a dominant share of the global banking system, including all <a href="http://www.financialstabilityboard.org/wp-content/uploads/r_141106b.pdf" target="_blank">30 groups</a> (14 in the European Union, 8 in the United States, 3 in China, 3 in Japan, and 2 in Switzerland) classified as global systemically important banks by the Financial Stability Board. Thus, even if future reports find other jurisdictions materially non-compliant or even “non-compliant” (the worst grade), the EU and US will remain the laggards among the most important banking jurisdictions.</p>
<p>As cynics may note, compliance status for a country or region does not imply that all corresponding banks are safe and sound. The RCAP process does not look at how rigorously and reliably the rules are implemented and enforced, only at whether the rules conform to the global accord. Gaps in governance and implementation may exist in some emerging markets and developed economies. Acknowledging these gaps, the Basel Committee has initiated separate assessments of outcomes, starting with <a href="http://www.bis.org/publ/bcbs267.htm" target="_blank">risk-weighting calculations</a>, which are the target of many of the Basel framework’s most biting critiques. (The Basel Committee also <a href="http://www.bis.org/publ/bcbs290.pdf" target="_blank">monitors</a> whether jurisdictions have adopted Basel&#0160;III rules at all, irrespective of their compliance status.)</p>
<p>The RCAP process appears rigorous, balanced, and thorough. An ad hoc assessment team is formed for each report, composed of delegates from the supervisory authorities of jurisdictions other than the one being assessed, and supported by members of the Basel Committee’s permanent secretariat staff. A review team and a RCAP peer review board examine its work. Relevant identities are disclosed in each report. For example, Mark Zelmer, Canada’s deputy superintendent of financial institutions, led the team assessing the European Union. Mark Branson, chief executive of the Swiss Financial Market Supervisory Authority (FINMA), did so for the United States. Of seven other team members for the US report, five were from the European Commission or from individual authorities of EU member states, and the other two from China and Japan. Additional checks and balances have also been introduced since the first reports in 2012.</p>
<p>The assessment itself is comprehensive and authoritative, citing local context, impact on selected banks (which are identified), amendment processes under way, and responses from public authorities. The EU report thus includes a joint response from the European Commission, the European Banking Authority (EBA), and the ECB. The US report includes a joint response from “the US agencies,” including the Federal Reserve Board, the Federal Deposit Insurance Corporation, and the Office of the Comptroller of the Currency. The EU and US responses commend the work of the RCAP assessment team, even while contesting some conclusions. To be sure, financial policy is not an exact science, and individual judgment by the assessment team members plays a role.</p>
<p>The reports examine 14 specific “components” in each jurisdiction. For the EU, two weaknesses are highlighted. The EU Capital Requirements Regulation (CRR) of 2013 allows more leeway than the Basel framework to apply a zero risk-weight to banks’ claims on sovereign and other public-sector debtors, as well as reduced risk weights to claims on small- and medium-sized enterprises (SMEs). As a result, the report grades the “credit risk: internal ratings-based approach” component as materially non-compliant. Another weakness is that the CRR exempts certain derivatives transactions of banks with public-sector entities and nonfinancial corporate entities from a capital charge for counterparty risks known as credit value adjustment (CVA), with material impact on actual capital ratio calculations. As a result, the EU report grades the “counterparty credit risk framework” component as non-compliant. In both these cases, the rules have been adjusted during the EU legislative process to favor the bank financing of governments, other public entities, and companies—steps that may be described as mild financial repression with European characteristics.</p>
<p>As for the United States, the components “credit risk: securitization framework” and “market risk: standardized measurement method” are graded materially non-compliant, in both cases because the Dodd-Frank Act of 2010 prevents banking regulations from explicitly referring to the ratings produced by credit ratings agencies. For both the European Union and the United States, four additional components are graded largely compliant. All remaining components are deemed compliant, except one that has not been implemented in the United States and is thus assessed as not applicable.</p>
<p>The Basel Committee’s assessment is actually milder on one component regarding the European Union than could have been expected. That component, “definition of capital and calculation of minimum capital requirements,” is graded largely compliant (as it is also for the United States). The report notes a number of departures from Basel&#0160;III under this chapter. Among them is the treatment of insurance subsidiaries (which are important for large French banking groups), the capital of cooperative banks (important in Germany and other member states), and temporary accounting quirks on the booking of losses on sovereign debt portfolios. These departures from Basel&#0160;III were included early in the elaboration of the capital requirements regulation under what has been labelled the “Danish compromise” because it was negotiated during the Danish Presidency of the Council of the European Union in 2012. The compromise led the first RCAP report of October that year to grade the draft CRR as materially non-compliant on the definition of capital criterion. Since then, EU negotiators have apparently convinced the assessment team that the corresponding impact is less significant than initially feared.</p>
<p>The European Union has departed from the Basel standard more than other advanced economies in part because of the preference—at least until the inception of banking union in mid-2012—for hiding banks’ problems as long as they could still satisfy their short-term obligations. This lenient approach, politely referred to as supervisory forbearance, has affected the position of several EU member states in the Basel Committee during the negotiation of Basel&#0160;III in 2008–10. It has also shaped the legislative process that led to the CRR and its complement, the fourth EU Capital Requirements Directive (CRD4), which was finally adopted in June&#0160;2013. The absence of a sustainable fiscal framework at the euro area level largely explains (and arguably justifies) the risk-weighting of euro area sovereign exposures at zero. The aim to favour the direction of credit to struggling member states and companies led to the amendments on SME risk-weighting and CVA risk exemption in the later phases of the CRR/CRD4 legislative process. The European Union could have restricted the contentious provisions to small- and mid-sized banks, avoiding any problem of Basel&#0160;III compliance because the Basel accords are only intended for large internationally active banks. But the EU, perhaps influenced by larger banks, has long preferred to apply the same prudential rules to all banks irrespective of size.</p>
<p>Even so, the EU departure from Basel&#0160;III has downsides:</p>
<ul>
<li>It results in more lax supervisory standards. Banks’ regulatory capital ratios are higher than they would be if Basel&#0160;III had been consistently applied. (The size of the difference depends on each bank’s specific risk profile.) The looser standards undermine trust in the European banking sector as a whole. Investors are left in the dark as to how much lower the ratios would be under “full” Basel&#0160;III. For example, the recent comprehensive assessment of the euro area’s 130 largest banks resulted in the publication by the EBA of a measure of capital ratios that was widely referred to by the media and analysts as “fully-loaded Basel&#0160;III.” But that assessment was actually (as the EBA correctly described it) a CRR/CRD4 ratio based on the rules to become applicable in 2016, after the expiration of transitional provisions. Though progress from previous practice on supervisory transparency was achieved, these disclosures fall short of informing investors about each bank’s capital strength according to Basel&#0160;III.</li>
<li>The departure from the global framework undermines the European Union’s influence in the Basel Committee, and more generally in global financial standard-setting bodies. In such bodies, as a senior policymaker once put it, “compliance is influence:” all things equal, the more a jurisdiction can credibly claim that it applies the agreed standards faithfully, the more impact it can have on future revisions or new standards. The European Union had such moral authority following its swift adoption of the previous Basel&#0160;II accord of 2004, and has not refrained from blaming the United States about its own delayed process of Basel&#0160;II adoption. But this advantage eroded when the crisis revealed major flaws in the Basel&#0160;II framework, and is now impaired as the European Union lags in adopting the more rigorous Basel&#0160;III.</li>
<li>The European Union has long championed the emergence and strengthening of global financial standards as a general proposition. Its long-term interest remains aligned with successful global financial regulatory initiatives. But by not complying with Basel&#0160;III, the EU weakens the global authority of the Basel Committee itself. Other jurisdictions may now introduce their own deviations from the global standards, under debatable assertions of local or regional specificities, and invoke the EU precedent.</li>
</ul>
<p>For these reasons, the European Union should readjust its supervisory practice and prudential legislation, to comply with Basel&#0160;III as it did with Basel&#0160;I and Basel&#0160;II. Annex&#0160;16 of the RCAP report helpfully lists 11 “issues that the European Union should consider to evaluate progress in aligning the EU capital regulations with the Basel framework.” The Basel Committee prefers this diplomatic phrase to simpler “recommendations,” because it does not want to be seen as being heavy-handed in seeking removal of the “materially non-compliant” mark.</p>
<p>Prospects for such convergence are mildly encouraging. The European Commissions’ <a href="http://europa.eu/rapid/press-release_STATEMENT-14-2403_en.htm?locale=en">statement</a> in response to the RCAP report’s publication is more open and constructive than in October 2012, when the Basel Committee’s first assessment was <a href="http://europa.eu/rapid/press-release_MEMO-12-726_en.htm" target="_blank">denounced</a> by Michel Barnier, then European commissioner. This time the shrill response has come from the European Parliament’s main political groups via a scathing <a href="http://www.eppgroup.eu/press-release/Senior-MEPs-rebuff-criticism-by-Basel-Committee" target="_blank">joint statement</a> assailing the Basel Committee as “a body that is working without legitimacy and without any transparency.” The lawmakers’ assertion that the Basel Committee “cannot modify the decisions taken democratically by the European institutions” is beyond dispute. But the irony, not missed by <a href="https://twitter.com/spignal/status/540855912169476096" target="_blank">some</a> observers, is that their arguments mirror those used by Eurosceptics who paint the European Union itself as unaccountable, opaque, and illegitimate and reserve the democratic label exclusively for national institutions. In fact, the Basel&#0160;III accord received ringing endorsements from political principals of the world’s main economies, including the European Union and its largest member states, in successive summits of the G-20 since 2010. In spite of the posturing, however, future revisions of the EU CRR/CRD4 legislation, and of the Basel&#0160;III accord itself, could gradually eliminate at least some of the most egregious non-compliance provisions.</p>
<p>On a shorter time horizon, the ECB has an important role to play (since November&#0160;4) as the supervisor of all euro area banks—directly for the 120 largest ones and indirectly, through a common policy framework, for the others. It can use its supervisory discretion (what the Basel jargon calls Pillar&#0160;II measures) to impose stricter capital requirements than the minimum ones set by the CRR, and may align these with a more consistent application of the Basel&#0160;III accord. It may also disclose how much a “fully-loaded” application of Basel&#0160;III would reduce each bank’s capital ratio, something that it has the authority to enforce under the EU’s banking union legislation. In October 2014, both the ECB and the Single Supervisory Mechanism that it hosts have become full members of the Basel Committee, in which the ECB had only observer status before. The compliance-is-influence principle also applies to it. To maximize its impact in setting the future global standards on bank capital and prudential regulation, the ECB should use its new authority over banks to impose practices that better comply with Basel&#0160;III than the imperfect minimum set in the EU CRR/CRD4 legislation.&#0160;</p>Blog PostsNicolas Véron2014-12-10T16:00:35-05:00Defining Europe's Capital Markets Unionhttp://veron.typepad.com/main/2014/11/defining-europes-capital-markets-union.html
Bruegel today published a Policy Contribution in which I explore the EU's "concept under construction" of a Capital Markets Union. I argue that to make a meaningful (and positive) impact, the corresponding policy agenda must be much more ambitious than...<p><a class="asset-img-link" href="http://veron.typepad.com/.a/6a00d834cda30153ef01bb07ab32d2970d-pi" style="display: inline;"><img alt="Cover_2014_CMU" border="0" class="asset asset-image at-xid-6a00d834cda30153ef01bb07ab32d2970d img-responsive" src="http://veron.typepad.com/.a/6a00d834cda30153ef01bb07ab32d2970d-800wi" title="Cover_2014_CMU" /></a>Bruegel today published a <a href="http://www.bruegel.org/publications/publication-detail/publication/855-defining-europes-capital-markets-union/" target="_self">Policy Contribution</a> in which I explore the EU&#39;s &quot;concept under construction&quot; of a Capital Markets Union. I argue that to make a meaningful (and positive) impact, the corresponding policy agenda must be much more ambitious than tinkering at the edges of securities regulation, and should include politically difficult areas such as corporate financial disclosure requirements, the supervision and resolution of financial market infrastructure firms, insolvency and debt restructuring frameworks, and tax.&#0160;</p>
<p>A revised version of this paper was included in a <a href="http://www.piie.com/publications/interstitial.cfm?ResearchID=2724" target="_self">collective e-book</a> of the Peterson Institute on December 9,&#0160;on policies to revive Europe&#39;s anaemic growth.&#0160;</p>
<p><span class="asset asset-generic at-xid-6a00d834cda30153ef01bb07ab3339970d img-responsive"><a href="http://veron.typepad.com/files/bruegelpolicycontribution_2014_cmu.pdf">Click here to download the study</a></span>&#0160;if the above link doe not work.&#0160;</p>Bruegel PublicationsPIIE PublicationsNicolas Véron2014-11-13T11:25:05-05:00Europe's Banking Union Starts on an Encouraging Notehttp://veron.typepad.com/main/2014/10/europes-banking-union-starts-on-an-encouraging-note.html
This blog post was published today by Bruegel and the Peterson Institute. Sunday, October 26 was D-Day for Europe’s banks: At noon in Frankfurt, the European Central Bank (ECB) announced the results of its “comprehensive assessment” of the euro area’s...<p><em>This blog post was published today by <a href="http://www.bruegel.org/nc/blog/detail/article/1466-europes-banking-union-starts-on-an-encouraging-note/" target="_self">Bruegel</a> and the <a href="http://blogs.piie.com/realtime/?p=4564" target="_self">Peterson Institute</a>.</em></p>
<p>Sunday, October 26 was D-Day for Europe’s banks: At noon in Frankfurt, the European Central Bank (ECB) <a href="http://www.ecb.europa.eu/pub/pdf/other/aggregatereportonthecomprehensiveassessment201410.en.pdf?d2f05d43d177c25c57e065ebdbf80fe7" target="_blank">announced</a> the results of its “comprehensive assessment” of the euro area’s 130 largest banks, including an Asset Quality Review (AQR) and stress tests. Simultaneously in London, the European Banking Authority (EBA) announced the <a href="http://storage.eba.europa.eu/documents/10180/851779/2014%20EU-wide%20ST-aggregate%20results.pdf" target="_blank">results</a> of these stress tests for a larger sample of banks, including the largest banks headquartered in the European Union but outside the euro area.</p>
<p>This was meant as a cathartic watershed that would allow the ECB to take over its new role as the licensing authority of all the euro area’s banks and direct supervisor of the largest ones, a transfer of authority from national supervisors that will occur on Tuesday next week, November 4. The comprehensive assessment is intended to draw a line under years of unsatisfactory oversight by national watchdogs and to allow the ECB to start from a high level of trust.</p>
<p>On the face of it, these objectives appear to have been met, even though a definitive assessment will only be possible several months from now. The ECB identified 25 banks as having been undercapitalized as of end-2013; of these, 12 have raised enough capital this year to be technically compliant with capital requirements, but the other 13 need to submit recapitalization plans to the ECB within two weeks. Four of these are in Italy: Monte dei Paschi di Siena (MPS) (which may have to <a href="http://english.mps.it/Investor+Relations/Comunicati/Archivio/Banca+MPS+comprehensive+assessment+outcome.htm" target="_blank">lose its independence</a>), Carige in Genoa, Banca Popolare di Milano, and Banca Popolare di Vicenza: This puts a cloud above the Bank of Italy’s reputation as a supervisor, especially as several other Italian banks also appear fragile. Farther west in Lisbon, Banco Comercial Portugues (BCP) is among the other institutions asked to strengthen their balance sheet, or else. In total, the assessment identified slightly more “problem banks” than expected but did not uncover problems so massive that they may trigger systemic instability.</p>
<p>Perhaps more importantly, the ECB (and EBA) flooded the market with a deluge of data, the full analysis of which will take several more days. One not-so-hidden nugget of information is how the banks would have fared if a more rigorous yardstick of capital, known as fully-loaded Basel III, had been used instead of the current “phased-in” measure that Basel III will replace in the European Union in a few years. In that case, a few significant German banks would have failed the test as well. They include HSH Nordbank, a northern German Landesbank that provides wholesale services to local savings banks (Sparkassen), in spite of the guarantees it has received for up to €10 billion from the local governments that are also its main shareholders. This group also includes DZ Bank and WGZ Bank, the two wholesale institutions that serve Germany’s system of local cooperative banks (Volksbanken and Raiffeisenbanken)—possibly the biggest surprise of Sunday’s entire disclosure package. The fact that Germany and Italy, two of the euro area’s biggest countries, are not immune to the ECB’s inquisitiveness suggests that the assessment has been kept reasonably independent from political pressure. In the two other largest countries, France and Spain, most banks passed the test successfully.</p>
<p>Crucially, this exercise must be seen as the beginning of a sequence of policy actions by the ECB—even as, to the thousands of professionals who participated in the process, it may feel like the end point of a long hard slog. To start with, investors and the public will need to be persuaded that there are no more skeletons hiding in the banks’ cupboards. This is likely to take a few months: The credibility of the EBA-led stress tests whose results were announced in mid-July 2011 was later ruined by the problems of Dexia in October 2011, then of Bankia in May 2012. Moreover, some of the AQR’s consequences will only be felt in the banks’ financial statements as of end-2014: For example, more of the €136 billion of additional nonperforming loan exposures identified in the AQR may be written down at that time. Overall, the definitive assessment on the robustness and credibility of the comprehensive assessment, and specifically of the AQR, will probably have to wait until the first quarter of 2015.</p>
<p>Furthermore, the ECB has a lot of followup work on its plate on a number of issues it has signalled it will address gradually after its assumption of direct supervisory authority on November 4. It should gradually tighten the definition of capital to make it fully compliant with the Basel III framework, including on the contentious question of insurance subsidiaries of diversified banking groups (a point on which even today’s “fully-loaded” disclosures are based on a laxer standard than the international accord, and which is particularly sensitive for several large French banks). It should put an end to the widespread practices of geographical ring-fencing of capital and liquidity by national supervisors within the banking union area, an aim that may eventually require legislative changes in Germany and elsewhere. It should vigorously encourage those banks that keep a high home-country bias in their sovereign debt portfolios to reduce it, something that ECB top supervisor Danièle Nouy has already <a href="http://www.ecb.europa.eu/press/inter/date/2014/html/sp141007.en.html" target="_blank">announced</a>. It should encourage cross-border bank acquisitions, and investment in banks by international private equity funds, to decrease the sector’s current fragmentation along national lines. Finally, it should gradually bring smaller banks (<a href="http://blogs.piie.com/realtime/?p=4509">mostly</a> German, Austrian, and Italian) into its supervisory fold, as Ms. Nouy’s deputy Sabine Lautenschläger has <a href="http://mobile.businessweek.com/news/2014-09-30/ecb-raises-savings-banks-focus-on-possible-cluster-risk" target="_blank">indicated</a>.</p>
<p>The full economic impact of the comprehensive assessment will depend on these developments still to come. If all goes according to plan, it may unlock some of Europe’s repressed growth, by allowing most banks to lend more freely now that their creditworthiness has been duly checked—even though this will not resolve a number of other problems in Europe’s anaemic economy that contribute to depressed credit demand. Overall, this debut of Europe’s banking union comes <a href="http://www.piie.com/publications/interstitial.cfm?ResearchID=1236">five years too late</a>, but better late than never. It is an encouraging start for the most transformative policy initiative that has emerged from Europe’s crisis so far.</p>Blog PostsNicolas Véron2014-10-27T13:46:06-04:00The Standoff between France and the EU on Fiscal Policyhttp://veron.typepad.com/main/2014/10/the-standoff-between-france-and-the-eu-on-fiscal-policy.html
Steve Weisman conducted a joint interview of Jacob Kirkegaard and me on the French budget and its possible non-compliance with European fiscal policy arrangements. This was posted yesterday on the Peterson Institute's website, in both audio and video formats.<p><a href="http://www.iie.com/staff/author_bio.cfm?author_id=581" target="_self">Steve Weisman</a> conducted a joint interview of <a href="http://www.iie.com/staff/author_bio.cfm?author_id=274" target="_self">Jacob Kirkegaard</a> and me on the French budget and its possible non-compliance with European fiscal policy arrangements. This was posted yesterday on the Peterson Institute&#39;s website, in both <a href="http://www.piie.com/publications/interviews/interview.cfm?ResearchID=2688" target="_self">audio</a> and <a href="http://www.youtube.com/watch?v=2-6Rg94o9mM&amp;feature=youtu.be" target="_self">video</a> formats.&#0160;</p>PIIE InterviewsNicolas Véron2014-10-11T13:22:42-04:00Free Flash Cards for Commissioner-designate Jonathan Hillhttp://veron.typepad.com/main/2014/10/free-flash-cards-for-commissioner-designate-jonathan-hill.html
This was posted today by Bruegel and the Peterson Institute (in two parts: I and II). The President-designate of the European Commission, Jean-Claude Juncker, has nominated Jonathan Hill, previously a UK government minister, as Commissioner-designate for Financial Stability, Financial Services...<p><em>This was posted today by <a href="http://www.bruegel.org/nc/blog/detail/article/1447-flash-cards-for-european-commissioner-designate-jonathan-hill/" target="_self">Bruegel</a>&#0160;and the Peterson Institute (in two parts: <a href="http://blogs.piie.com/realtime/?p=4527" target="_self">I</a> and <a href="http://blogs.piie.com/realtime/?p=4529" target="_self">II</a>).&#0160;</em></p>
<p>The President-designate of the European Commission, Jean-Claude Juncker, has nominated Jonathan Hill, previously a UK government minister, as Commissioner-designate for Financial Stability, Financial Services and Capital Markets Union. The European Parliament has a veto on the eventual confirmation of the whole Commission, and has used this right in the past to request and obtain the replacement of individual candidates it deemed unfit. As part of the confirmation process, the Parliament’s Economic &amp; Monetary Affairs Committee has quizzed Mr&#0160;Hill on October&#0160;1, and decided to conduct a second hearing session next week. In preparation thereof, President of the European Parliament Martin Schulz has sent a <a href="http://www.sven-giegold.de/wp-content/uploads/2014/10/Questions-to-designated-commissioners.pdf">list of questions</a> to Mr&#0160;Hill on October&#0160;2. The 23 questions in that list are copied below.</p>
<p>To enable Mr Hill’s overworked staff to enjoy a rare sunny weekend in Brussels, ready-made answers are suggested here. With due regard to the European Commission’s ever-stretched finances and to avoid any possible perception of conflict of interest, they are provided free of charge.<a href="file:///C:/Users/user/Documents/Drafts/Blog_Oct2014_Hill_Bruegel.docx#_ftn1" name="_ftnref1" title="">[1]</a></p>
<p><em>1. What is your vision of a well-regulated and integrated Capital Markets Union? How do you define the concept, what are its features and what are in your opinion the three most important elements to achieve a Capital Markets Union?</em></p>
<p>Well these are meaty questions, so I will make a bit of a longish answer. The concept of the Capital Markets Union is the fulfilment of the Treaty’s promise of a single market for financial capital in the EU. The single biggest obstacle to this vision was the fragmentation of the banking supervisory framework, a crucial one given that banking intermediation represents most of the EU’s financial system. Now that this obstacle is being lifted thanks to banking union, we need to go further in creating a single market for capital. Because London is the hub of the EU’s capital markets, this needs to encompass all EU member states in a way that was not as critical for banking union, as Commission President-designate Jean-Claude Juncker helpfully reminded me in my <a href="http://ec.europa.eu/about/juncker-commission/docs/hill_en.pdf">mission letter</a>.</p>
<p>As with banking union, the features of the Capital Markets Union are about regulation, supervision, and crisis management. In regulation, I will seek to fulfil the <a href="http://ec.europa.eu/internal_market/finances/docs/de_larosiere_report_en.pdf">Larosière Report</a>’s vision of a single rulebook, taking into account the principles of subsidiarity and proportionality with regard to existing national rules that affect capital markets. In supervision, I will review which non-bank financial firms need to be supervised, and for those that need to, whether the national or European level is most appropriate. For example, credit rating agencies and trade repositories are – appropriately, in my view – supervised at the European level by the European Securities and Markets Authority (ESMA). I believe it is appropriate that small audit firms be supervised by national audit regulators, even though I am less sure about firms that belong to the larger international audit networks. Financial consultancies and the like are not supervised at all. I will also review crisis management and guarantee frameworks for those non-bank financial firms that may require a special resolution regime or any other form of intervention process other than court-ordered insolvency in case of failure. I am thinking particularly of financial market infrastructures here, and specifically about central counterparties (CCPs) for which I have promised a recovery and resolution framework in the <a href="http://ec.europa.eu/about/juncker-commission/docs/2014-ep-hearings-reply-hill_en.pdf">answers</a> I sent you a few days ago.</p>
<p>As I wrote in these answers, the Capital Markets Union will have to be initiated quickly. But some of its components will take time to elaborate, decide and implement. I will duly consult and listen before entering into detailed proposals. That said, I can already tell you that I see the three most important elements as being:</p>
<p>(1)&#0160;&#0160;&#0160; An overhaul of the policy framework for capital markets infrastructure in the EU. I said during my hearing on Wednesday that I needed to get the plumbing right, so here we go. All market practitioners know that national barriers to sharing infrastructure, aided and abetted by economic nationalism (the promotion and protection of national champions), are a major factor of unnecessary cost and market fragmentation in Europe. I want Europe to have as efficient, cost-effective and innovative market infrastructure companies as the United States.</p>
<p>(2)&#0160;&#0160;&#0160; A quantum leap for consumer and investor protection. For example, it is common knowledge that while the EU has adopted common accounting standards by endorsing International Financial Reporting Standards (IFRS), these standards’ implementation and enforcement are not fully consistent across the EU because of separate national audit firms, audit regulators and enforcement authorities. I want us to do better than that.</p>
<p>(3)&#0160;&#0160;&#0160; An unprecedented EU effort on national insolvency frameworks. These need to be reformed and partly harmonized to allow for better financing of fast-growth companies and securitization of Small- and Medium-sized Enterprises (SME) loans. I know this is a political minefield but I will not shy away from the endeavour. Also, to complete the banking union, I will seek the creation of a single insolvency regime for large banks, perhaps as an alternative option to existing national regimes. I believe this can be achieved without Treaty change.</p>
<p>There are other elements of course, such as new rules on securitization, money market funds and other financial products; a review of possible obstacles to SME and infrastructure financing that may come from our prudential rules (especially Solvency II); and perhaps some work on the taxation of savings, even though I am aware of how difficult it will be to reach any form of harmonization in this latter area.</p>
<p><em>2. What are the main barriers to creating a Capital Markets Union? What specifically needs to be done for these barriers to be removed? Which ones will you be giving priority and why?</em></p>
<p>There are all sorts of barriers inherited from the past, and maintained by the pervasive economic nationalism that remains a key driver of our policy framework, in spite of all the lip-service given by member states to their obligations under EU treaties. To remove such barriers, I need to ceaselessly analyse and expose the costs of market fragmentation and the economic benefits of capital markets development, which require a degree of market integration. Let me stress that the objective is not integration or centralization for the sake of it, but to develop our capital markets for the benefit of all EU citizens.</p>
<p><em>3. If securitisation is to be revived, please outline your view of how it can be made safe and how it will lead to growth and jobs.</em></p>
<p>Financial activities are based on a trade-off between risk and reward and can thus never be made perfectly safe – otherwise it is the safety of the graveyard, as they say. I believe the recent <a href="http://www.bankofengland.co.uk/publications/Documents/news/2014/paper300514.pdf">joint paper</a> of the Bank of England and European Central Bank can be a good starting point for our reflection. I expect to be able to make more specific proposals before the end of 2014.</p>
<p><em>4. What legislation can be adapted or introduced to support he further development and diversification of capital markets? How would this lead to SME&#39;s gaining better access to long-term funding via capital markets?</em></p>
<p>One instrument is to legislate on specific products or market segments to make sure they are properly monitored and stay within reasonable prudential limits, such as the Commission’s <a href="http://eur-lex.europa.eu/legal-content/EN/TXT/PDF/?uri=CELEX:52013PC0462&amp;from=EN">proposal</a> on European Long-term Investment Funds. I will develop more proposals of this kind. However, I believe the framework conditions for capital markets development are even more important, in good <em>Ordnungspolitik</em> fashion as I may say in the language of Master Eckhart. (Or was it Erhard?) Thus my three priority elements as outlined under Question&#0160;1.</p>
<p><em>5. What recommendations would you suggest with regards to digital currencies like bitcoin?</em></p>
<p>I need more in-depth analytical work on this, and more generally on how technology is rapidly changing the shape of our financial system and the very categories through which we think about finance and regulate it. It is frustrating that people make more mobile payments in Kenya than in most EU countries. I want to be much more ambitious in adapting our financial regulatory framework so that it allows EU citizens to benefit from great new technologies, while providing adequate protection for consumers and against systemic and other risks.</p>
<p><em>6. What is your opinion on high frequency trading in general and its compatibility with the need to stimulate long term financing?</em></p>
<p>High-frequency trading is one form of technology-enabled financial innovation. I will consider it in a dispassionate way, and will also look with interest at what the US authorities are envisaging in this regard. There are both investor-protection and financial-stability concerns about HFT, which I take seriously but on which I have not drawn conclusions yet. Having said that, our financial system is vast, and it includes many different segments. I don’t see why the simultaneous existence of HFT and long-term financing should pose a problem <em>per se</em>.</p>
<p><em>7. The Chair of the European Banking Authority indicated that certain banks might not pass the on-going stress tests. Should this happen, what action would you take?</em></p>
<p>We are building up the Single Resolution Board and it will be ready for the deadlines set by the Single Resolution Mechanism Regulation. That said, in the next few months the responsibility for addressing the consequences of the European Central Bank (ECB)’s Comprehensive Assessment in terms of bank restructuring and resolution remains at the national level. Of course, I will monitor such developments closely and participate actively in those discussions that have a euro-area or EU dimension in this respect.</p>
<p><em>8. Could you provide details on how you see the distribution of responsibilities between yourself and Commissioners-designate Moscovici and Katainen in respect of issues in ECON’s field of competence, as well as the distribution of responsibilities between yourself, Commissioners-designate Moscovici and Dombrovskis, particularly with regard to the external representation of matters concerning the euro area?</em></p>
<p>I will work with Vice President Katainen under the terms set by my mission letter. Commissioner-designate Moscovici will take the lead on the Financial Transaction Tax and other issues of taxation, but I look forward to working together with him on assessing and addressing any possible impact in terms of market integration and financial stability. The teams that are transferred under my responsibility from the European Commission’s DG&#0160;ECFIN will continue to play their important part in the financial sector assessment work of the so-called Troika. The external representation of matters uniquely linked to the euro area will be a task for Vice President Dombrovskis, assisted by Commissioner-designate Moscovici. Any external representation of matters concerning the banking union are for VP Katainen or (more probably) for me directly, as far as the Commission is concerned. And I will do external representation on EU financial regulation, for example in the Financial Stability Board, IFRS Foundation Monitoring Board, etc., the way my predecessor Michel Barnier did.</p>
<p><em>9. Taking into account he previous commitments of the Commission, are you in favour of a Single EU Deposit Guarantee Scheme? Will you make a legislative proposal to that effect, and if so when?</em></p>
<p>Well, as I am sure you well know, there can be no effective deposit guarantee without a potentially unlimited backstop from a credible fiscal capacity. This capacity currently exists at the national level but not at the European level, and is clearly not in my area of responsibility to create one. As soon as such a capacity exists, I will make proposals for a federal – oops, single – deposit guarantee scheme that will be backed by it. In the meantime, there is little more I can do than help implementing and enforcing the existing DGS Directive.</p>
<p><em>10. Can you make a clear commitment that when legislating for the EU28 you will guarantee the integrity of the single market and neither propose nor support or introduce double majority voting applicable to euro area and non-euro area Member States such as in EBA?</em></p>
<p>I do commit to the integrity of the single market. Now, as you know, I inherit some tricky issues as the Single Supervisory Mechanism (SSM) regulation and SRM regulation do not treat all member states equally. This was a necessary consequence of the political conditions under which they were adopted, not least the sometimes irrational unwillingness of my country of citizenship to participate in common-interest EU initiatives. (May I quote from the February 2014 <a href="http://www.parliament.uk/documents/lords-committees/eu-sub-com-a/GEMU/GEMUReportWITamends.pdf">report</a> of the UK House of Lords here, paragraph 187: “It would be wise not to close the door on the possibility of some level of [UK] participation in Banking Union in the future, in particular as a means of further promoting and shaping the Single Market in Financial Services and the UK’s position within it”.)</p>
<p>As for double majority voting, it was found appropriate for the EBA last year. But in his mission letter, President Juncker asked me to “review the governance and the financing” of the European Supervisory Authorities, including the European Banking Authority. I will do this with an open mind and you will of course be closely associated with such review.</p>
<p><em>11. How do you intend to deal with discrepancies between EU and other important jurisdictions, notably USA? Which approach do you intend to take on third-country equivalence decisions? How do you plan to involve the European Parliament in third-country related matters?</em></p>
<p>This is a very complex area, and I cannot have a one-size-fits-all approach. The current discussion on financial services in the Transatlantic Trade and Investment Partnership does not look promising. I will need to give a serious second look at our objectives and proposals in this respect. The European Parliament will of course be involved in policy decisions that correspond to a legislative level, but not in individual supervisory decisions, as is common practice in finance.</p>
<p><em>12. Will you keep the European Parliament fully informed about the work being done in international bodies such as the FSB, Basel Committee, the IASB, and guarantee that unnecessary and unadapted rules for the EU financial sector are being avoided?</em></p>
<p>I will inform the European Parliament in these areas in line with what I will identify as best practices in other advanced democratic jurisdictions that are members of these bodies. These organizations being global, I cannot commit on their decisions. That said, I will do my best to favour decisions that are aligned with the European interest, and can be implemented in Europe in a fully compliant manner. I will also take a second look at areas in which the EU is currently not fully compliant with the global standard, such as the IAS&#0160;39 accounting standard and some aspects of Basel&#0160;III.</p>
<p><em>13. What do you think of the proposals on Eurobonds made by the Commission in the Green Paper on the feasibility of introducing Stability Bonds?</em></p>
<p>I now have a particularly informed view on the subject. I believe that Eurobonds are part of a broader debate about what could be a sustainable fiscal framework for the euro area. I also believe that the sustainability of the current euro area fiscal framework is open to question, even though this will not be in my area of primary responsibility as a Commissioner. Frankly, we know that more debate and evolution of the national consensus is needed in Germany before this issue can move significantly, so I’ll stop there and let Chancellor Angela Merkel take the lead.</p>
<p><em>14. What do you think about payment regulation and the fact that payments in the Member States to suppliers should be done within 60 or 90 days at most?</em></p>
<p>I like the idea, but need to check whether this falls within my responsibility or is on a colleague’s turf.</p>
<p><em>15. You agreed that the problem of “to-big-to-fail” banks is important and persists. Can you outline how you intend to address it through legislation currently on the table and, potentially, new initiatives? Can you outline what a healthy European banking system looks like?</em></p>
<p>As for the January <a href="http://eur-lex.europa.eu/legal-content/EN/TXT/PDF/?uri=CELEX:52014PC0043&amp;from=EN">proposal</a> of the European Commission on banking structural reform, I will consult extensively before taking a stance. I am sure you will also soon undertake hearings of your own. I have two clear objectives for this legislation. First, it should be a genuine single rulebook, at least inside the banking union area and I believe also for the EU as a whole: some recently adopted national legislation may need to be modified as a consequence. Second, it should facilitate not impede the resolvability of banks, even though I know full well this is easier said than done. Having some convergence with the so-called Volcker Rule in the US would be nice as well, though not a must-have. For the rest, I have an open mind.</p>
<p>Beyond this text, I am following with particular attention the FSB work on bank resolution and still believe a globally consistent framework can be agreed upon there, in which case I will work at its compliant adoption in the EU. A healthy European banking system should be diverse, well-capitalized, well-managed and well-supervised.</p>
<p><em>16. The IMF is warning about an uncontrolled rise of shadow banking activities. You stated a need to be vigilant of the risks such activities entail but also to distinguish economically useful activities of this kind from others. Can you outline how you propose to detect these activities, assess their utility and ensure the application of the principle of “same risks, same rules”? In this regard, what is your opinion about the key provisions regarding the Commission legislative proposal on Money Market Funds?</em></p>
<p>There is no such thing as a typical shadow banking activity. The generally accepted (though arguably incorrect) use of the term refers to all non-bank finance. This encompasses myriads of market segments, defined by what they are not (namely, banks) not by what they are. We need to be humble as regards assessing what you call their economic usefulness: economists have not yet come up with a working macroeconomic model of the financial sector, and are unlikely to do so for a while yet. That said, I will do my best. Money Market Funds are one of these segments, and I believe the Commission proposal’s key provisions are reasonable.</p>
<p><em>17. You made several references in your written and oral answers to ECON about the possibility that we “may have got it wrong” in certain aspects of financial markets regulation and their interactions to the detriment of the real economy. Can you provide some examples of areas where this could be the case? Can you outline how you propose to detect such cases?</em></p>
<p>I believe the third regulation of credit rating agencies (CRA&#0160;III) is a good example of politically motivated regulatory overkill. Some aspects of the European Market Infrastructure Regulation (EMIR) also appear to require review in light of the experience of their early implementation so far.<a href="file:///C:/Users/user/Documents/Drafts/Blog_Oct2014_Hill_Bruegel.docx#_ftn2" name="_ftnref2" title="">[2]</a></p>
<p>I will ask an independent task force of highly respected luminaries to do an in-depth review of overlaps, underlaps, inconsistencies, unintended consequences, and mere bad drafting of currently applicable legislation and rules, with the aim of having a comprehensive report by early 2016. Without wanting to boast about UK experiences, I believe the Independent Commission on Banking (also known as Vickers Commission) provides a good benchmark in methodological terms. It had a temporary secretariat for a period of up to a year, formed of very capable technocrats seconded by various public authorities, and gave an extensive look at the academic and other analytical literature not just at the legal or political context. Such features could inspire me for the review task force.</p>
<p><em>18. You mentioned in your written responses that one of the key features of this parliamentary term will be the renegotiation of the relationship between the UK and EU. As a senior member of the UK government, you will be fully aware of any contentious areas in the financial services portfolio. Could you outline what they are and what strategy you would suggest to deal with potential conflicts between UK and EU objectives?</em></p>
<p>Put simply, the City of London serves the entire EU (and to an extent as well, the global economy) but is primarily supervised, and largely regulated, by the UK government and its agencies. There is a tension there. The EU interest, the UK interest and indeed the interest of the City (though I won’t pay any attention to the latter) are aligned on many topics, but not all. Systemic risk management is a good example of misalignment, as sadly illustrated by the ongoing lawsuit by the UK against the ECB on its so-called location policy for CCPs. My strategy is simple. I will work entirely for the EU interest, within the framework of EU institutions that give a significant voice to the UK government and citizens. I believe that a strong, internationally competitive and properly supervised City of London is absolutely in the EU interest.</p>
<p><em>19. You committed yourself to the principle of proportionality. Can you outline measures and proposals you want to put forward in order to ensure that small and low complexity financial actors will not be pushed out of the market because of regulatory burden?</em></p>
<p>This is a case-by-case question. For example, the Alternative Investment Fund Managers Directive has size thresholds under which some provisions do not apply. If I decide to propose a revision of AIFMD, I will certainly keep the principle of such thresholds.</p>
<p><em>20. Could you provide the committee with a complete list of the financial services clients you personally, or the companies in which you held directorships or shares, worked for?</em></p>
<p>See Appendix A. [Appendix A still to be drafted.]</p>
<p><em>21. Do you agree that financing of the three European Supervisory Authorities wholly by the sectors they supervise, as indicated in the mission letter by President-elect Juncker, is simply taxation through the back door?</em></p>
<p>Well, financing them out of the EU budget is also taxation through the back door, or maybe the front door depending on your perspective. These are public institutions, and their funding cannot be based on voluntary donations. My understanding of my mission letter is that the funding should be changed to make it more predictable, more sustainable and less prone to frequent political negotiation. Such change would be appropriate and indeed needed for independent supervisory authorities. As I said before, their governance needs to change as well, supporting their independence and mandate to serve the European public interest.</p>
<p><em>22. Could you provide us with a specific figure/estimate on the size of the implicit funding subsidy for Too Big to Fail Banks by taxpayers in the EU and how you envisage removing that subsidy by means of banking regulation?</em></p>
<p>Economic studies suggest this implicit subsidy is evolving over time and generally decreasing of late. I do not have a more specific quantitative snapshot at this point, but will work at reducing it further. See also Question&#0160;15.</p>
<p><em>23. In relation to the Commission proposal on Benchmarks, there is significant pressure to extend or increase the number of definitions of benchmarks. Do you take the view that it is appropriate to have different supervisory rules for different benchmarks, depending on their importance, which could give rise to regulatory arbitrage, or do you think it is better to have a simple supervisory rule that applies to all benchmarks?</em></p>
<p>I am instinctively wary of one-size-fits-all solutions to complex challenges, but your point on the risk of regulatory arbitrage strikes me as well-taken as well. I will also look at having a framework on benchmarks which is compatible with evolving requirements and practices outside the EU.</p>
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<p><a href="file:///C:/Users/user/Documents/Drafts/Blog_Oct2014_Hill_Bruegel.docx#_ftnref1" name="_ftn1" title="">[1]</a> It should be noted that unlike Mr&#0160;Hill, the author has no political affiliations or commitments. Therefore, these prepared answers for Mr&#0160;Hill do not necessarily reflect the personal opinions of the author.</p>
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<p><a href="file:///C:/Users/user/Documents/Drafts/Blog_Oct2014_Hill_Bruegel.docx#_ftnref2" name="_ftn2" title="">[2]</a> N.B. The author is an independent board member of the global trade repository arm of DTCC. More disclosures are on <a href="http://www.bruegel.org/">www.bruegel.org</a>.&#0160;</p>
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</div>Blog PostsNicolas Véron2014-10-03T11:01:19-04:00Banking Union in Nine Questions: Interparliamentary Conference Testimonyhttp://veron.typepad.com/main/2014/10/banking-union-in-nine-questions-interparliamentary-conference-testimony.html
On Tuesday 30 September, I participated in an Interparliamentary Conference bringing together representatives from parliaments of (almost) all EU member states as well as the European Parliament, hosted by the Italian Chamber of Deputies at Palazzo Montecitorio in Rome. My...<p>On Tuesday 30 September, I participated in an Interparliamentary Conference bringing together representatives from parliaments of (almost) all EU member states as well as the European Parliament, hosted by the Italian Chamber of Deputies at Palazzo Montecitorio in Rome. My <span class="asset asset-generic at-xid-6a00d834cda30153ef01bb0791a234970d img-responsive"><a href="http://veron.typepad.com/files/interparliamentaryconf_sep2014.pdf">written statement</a></span>&#0160;takes stock on banking union, its past, present and future. It was also posted by <a href="http://www.bruegel.org/fileadmin/bruegel_files/Publications/Testimonies/InterparliamentaryConf_Sep2014.pdf" target="_self">Bruegel</a> and the <a href="http://www.piie.com/publications/testimony/veron20140930.pdf" target="_self">Peterson Institute</a>.&#0160;</p>Other ArticlesNicolas Véron2014-10-03T10:55:40-04:00